Dr. Kent Moors writes: I was a guest on Chinese national television last night. The discussion was via a live satellite link that had me sitting in a Pittsburgh studio with the feed traveling through their affiliate in Washington.

I’ve done this before. But this time the discussion was all about a subject I have been personally involved in.

It had to do with the big Chinese move into Ecuador – one that has given Beijing the upper hand over who really controls of the country’s oil.

As long-time readers will recall, I have been advising on a refinery project in Ecuador for some time now. Slated for outside Manta on the country’s west coast, it’s known as The Pacifico Project, or locally as the Refineria

Project costs in this massive endeavor have swelled to about $13 billion. Nonetheless, the government still says the 300,000 barrel per day complex will begin operations in 2017.

The real story, however, lies in the combination of interests surrounding the facility.

As you’ll learn, this is just the latest example of the bold move by China into South American energy …

China’s Bold Move into Ecuador

When it comes to Ecuador these days, I can tell you Chinese fingerprints are everywhere you look.

In fact, The Pacifico Project will be built by Chinese Sinopec – Sinopec Shanghai Petrochemicals (NYSE: SHI) – while processing about 16% of its capacity in heavy oil from Venezuela. As of yesterday, it is also being primarily funded by Beijing and will have the China National Petroleum Corp. (CNPC) as a partner.

This move into Ecuador and other South American venues, mirrors similar moves in other parts of the world and is driven by Chinese finance. In Ecuador, this has produced a very significant result.

Of course, whenever I discuss such a matter of state interest with a national television network, it is often like walking on eggshells. But I still made the point clearly last night.

With this deal, China now controls Ecuadorian crude oil production.

Put another way, Beijing can now dictate where the oil exports are going from a member of OPEC. To be sure, Ecuador is the smallest producer in the cartel, about 500,000 barrels a day.

Even so, the symbolism is dramatic.

China’s Hidden Upper Hand

This was accomplished because of the continuing financial difficulties faced by President Rafael Correa’s administration. The nation defaulted on its foreign bonds a few years ago, seriously limiting access to international capital. That allowed China to move in, offering funds at heavy rates with Ecuador having few genuine alternative sources.

Beijing has loaned billions to the government budget, the national oil company PetroEcuador, bankrolled the primary hydroelectric power project in the country, and is now about to finance one of the largest refineries in South America. Ecuador pays back these loans from the proceeds of its oil exports.

And the Chinese are rather creative in how that works out.

Only a rather small amount of the exports actually go directly to China. In fact, PetroEcuador still depends on selling most of its oil closer to home with U.S. and other North American companies, either receiving the shipments or having control over the contracts.

Nonetheless, anecdotal evidence, shipping manifests, and intelligence from sector sources point toward a Chinese control over up to 90% of the oil leaving Ecuador.

This is hardly the first time China has used loans to gain leverage over South American oil.

Chinese state banks have loaned more than $10 billion to Brazil and over $40 billion to Venezuela. Hydrocarbons are the essential collateral in each case.

These parallel similar steps elsewhere – at least $13 billion to Angola, upwards to $20 billion in Sudan, and a whopping $55 billion in Russia.

Add to this acquisitions in the region, such as the recent purchase of Brazilian state Petrobas (NYSE: PBR) assets in Peru and a cross-border pipeline project, and China’s goal to develop an integrated presence in South America is rapidly reaching fruition.

Yet to accomplish this Chinese companies need larger positions as operators upstream. SHI is already doing so in Ecuador, despite its primary experience being in refining.

A Mammoth Battle is Shaping Up

But this big move is fraught with very emotional political overtones. It is also the primary reason Chinese TV wanted me on last night.

You see, Correa is in a real political dogfight surrounding the next major oil development wanted by Quito. It has become a major controversy with an opposition coalition moving to have a national referendum to stop the project.

The Ecuadorian government plans to develop the Ishpingo, Tambococha, and Tiputini (ITT) oil block, pitting the state against environmentalists, indigenous populations and a wide swath of the scientific community.

This block is inside the Yasuni National Park, a UNESCO global biosphere area, the nation’s largest nature reserve, and the home of two indigenous tribes wanting nothing to do with the outside world.

The government has responded by closing the offices of a highly visible environmental group, claiming they have been fomenting violence. Meanwhile, the prospect of some 900 million barrels of crude continues to generate considerable interest.

Chinese companies are now positioning themselves to take a major chunk, despite the fact the project “officially” being run by state company, PetroAmazonias. On the other hand, any approach will need to be very carefully orchestrated, given the environmental fallout from another matter about to come back into the news.

The more than two decade-old legal fight between Chevron (NYSE: CVX) and the Ecuadorian government over massive pollution in the rain forest region of Oriente is heating up again. It was one of the most horrendous ecological disasters I’ve ever seen.

Initially, the development upstream there was by Texaco (later absorbed by Chevron) with claims being waged between the American company and PetroEcuador over who was really responsible for cleanup.

In its wake, a Chevron counter suit filed in a New York federal court should be ruled upon shortly. The liability here is now approaching $10 billion with a major judgment against the company already handed down in Ecuador.

The ITT development is now bringing back the same ecological concerns and adding fuel to an already tense situation. Foreign companies, certainly the Chinese, are going to need to walk a tightrope.

In the past, Correa has successfully championed environmental attacks against Western interests as a political tool, using them to condemn Chevron while pairing with the Chinese.

But his strong support for the ITT project may come back to dent his political image.

This is quickly escalating into a major test of how sophisticated the Chinese have become in the geopolitics of oil.

But I can tell you this will take more than just a large checkbook to pull off.

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